Charitable Deduction – Cannabis – Planning for July 1 Transition Rule Change

Charitable Deduction – Cannabis businesses should consider the implications of California transition rules which tax effect on July 1 with additional requirements for testing, packaging and labeling products.

Press Release (ePRNews.com) - Oakland, CA (USA) - Jun 24, 2018 - Charitable Deduction – Cannabis businesses should consider the implications of California transition rules which tax effect on July 1 with additional requirements for testing, packaging and labeling products. If inventory can no longer be sold, there are a number of strategies that

Charitable Deduction – Cannabis

should be considered. The rest of this post will highlight the general rules for claiming either a loss or charitable deduction in connection with the disposition of cannabis that can no longer be sold at retail.

Restrictions on the deductibility of an actual donation of cannabis [literally the plants] to a charitable organization.

There is no authority relative to IRC Sec. 280E disallowing charitable contribution.

If anyone is aware of authority which would limit the deduction, please let us know immediately. 

If plant inventory is destroyed or sold, the cost of the plants becomes part of Cost of Goods Sold, so there is no disallowance of the deduction under IRC Sec. 280E.

Charitable Donation

Sometimes you can get a larger deduction from distressed inventory by donating it to a tax-exempt charity. If a charity puts the distressed inventory to its intended use or to care for the ill, the needy or infants, the donating business might be able to deduct the fair market value of the inventory as a charitable donation. The deduction is limited to the lesser of the fair market value reduced by half the gain that would be recognized if it were sold or twice the tax basis in the inventory.

Companies looking to reduce inventory and take a tax deduction may donate obsolete inventory to a charitable cause. An agreement is made between the charity and you, saying the items were donated at no cost to the charity. You may deduct the fair market value for the inventory from your taxes following the donation. Inventory receipts signed by the charity and your business will document the transaction.

Charitable Deduction – Cannabis

Bona Fide Sales

A bona fide sale is simply selling the item to a salvage yard or liquidator. In these cases, the tax deduction is the fair market value minus what you recover for the item. If you sell obsolete inventory to a liquidator for $100, and the inventory has a market value of $1000 at the time of the sale, you have a $900 deduction for the sale. For it to be considered a bona fide sale, you cannot have any interest or rights to the property. To qualify for a bona fide sale deduction, it cannot be consigned to another seller.

Destruction of Inventory

You can get a tax deduction for obsolete inventory by destroying it.This is typically a last resort, as the tax savings are minimal. The IRS requires photographs before and after the destruction of the inventory to verify it has been destroyed. Additional documentation includes the market value of the item and the inventory purchase order. Destroying inventory may reduce property tax in certain states, and the IRS allows a minimal deduction of the value of the items.

Source : https://abizinaboxcannabis.com/charitable-deduction-cannabis/
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